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To the average investor, "correlation" once seemed to be one of those "little known, less cared about" ideas. But in today's increasingly connected global financial system, correlation takes on a whole new importance. Witness how our entire credit and financial system teetered on the brink of collapse when one market, the sub-prime credit market, started tumbling out of control.

Bear with me for just one short academic moment.

In the world of finance, correlation is a statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are uncorrelated.

In real life, perfectly correlated or uncorrelated assets are rare; rather you will find securities with some degree of correlation. For investors trying to build diversified portfolios that improve returns while reducing risk, correlation is not a good thing. In fact, it is a very bad thing. High correlation amongst investments means that as one goes up (or more recently) down, all the others move right along with it.

Unfortunately, the interconnectedness of global markets has led to a very high level of correlation between assets, not only among equities, but across most asset classes that, on the surface, don't seem like they should be all that correlated. According to The Economist, March 9, 2007, "Perhaps it should not be too surprising that, according to Merrill Lynch, over the past five years the Russell 2000 index of small American companies has a 94% correlation with the S&P 500, the main Wall Street index. More alarmingly, international stock markets have not offered any diversification either: they have shown a 95% correlation. Yet more startling are the figures showing that hedge funds have recorded a 94% link with shares. Even property has been following Wall Street 81% of the time."

Why should investors be concerned about this? For a very large segment of the population, our jobs/incomes (and any defined benefit pensions) are tied to the state of our employers/companies, which are tied to the state of the economy, which is tied to the state of the financial markets. Defined contribution pensions, 401k's, and IRA's are most commonly invested in equities (through mutual funds or self-directed accounts) and are therefore tied to the same set of risk variables in the economy (interest rates, energy prices, geopolitical instability, natural disasters, currency fluctuations, commodity prices, illiquidity of credit markets, etc.) When the entire house of financial cards starts tumbling, only uncorrelated assets have the ability to be a lifeline to investors' net worth.

Enter life settlements as investments. Life settlements are discounted cash settlements paid by investors to life insurance policyholders. In exchange, investors later receive the full amount of the life insurance policy upon the passing of the insured; a win-win transaction. Policyholders, who choose to sell their policy, receive cash now to enhance the quality of their remaining days. Investors receive an excellent return on investment, historically a double-digit return.

How does that solve the correlation dilemma facing investors today? The July 30, 2007 cover story of Business Week, Profiting From Mortality, states "Moreover, [life settlements are] 'uncorrelated assets,' meaning their performance isn't tied to what's happening in other markets. After all, death rates don't rise or fall based on what's happening to commodities, say. Uncorrelated assets like these are highly prized in an increasingly connected global financial system." Life settlements bring a true measure of diversification to investment portfolios at a time when most other investment asset categories are increasingly operating in parallel.

"Investors are attracted to life settlements because insurance is seen as a noncorrelated alternative asset. Life settlements provide noncorrelated diversification because insurance policies are independent of the factors contributing to economic downturns, such as interest rate fluctuations and increasing fuel cost. As a result, life settlements are one way to reduce a portfolio's exposure to sudden downturns in the stock and bond markets," according to Conning Research & Consulting, Inc.'s 2007 study "Life Settlement Market: Increasing Capital and Investor Demand".

Wall street firms have known this for years. Firms like Berkshire Hathaway and AIG have poured hundreds of millions of dollars into life settlement portfolios, to mitigate risk in all their other "correlated" assets. Institutional investors are using life settlements to shore up collateral for development projects. After all, unlike real estate, life insurance policies (logically) don't decline in value over time. Each day, a life insurance policy is one day closer to reaching full value.

Options for individual investors to participate in life settlement assets had been few, but the investment picture is improving. Funds are on the horizon, although not yet here, and fractional ownership arrangements already exist, that provide the diversification necessary to achieve a predictable rate of return for an individual life settlement investment portfolio.

Financial advisors have preached diversification for years. What they were really trying to say and most of them didn't realize it, was that investors need to uncorrelate their investments. Unfortunately for many of us, diversifying with a bunch of highly correlated assets achieved nothing, didn't diversify, only "deworsified". Life settlements, on the other hand, are one truly uncorrelated investment asset.

Dave Yelken is a life settlement expert and the owner of Accelerating Wealth, LLC, a financial services agency specializing in life settlement strategies, based in Bedford, Texas. To contact Dave, or to add yourself to his mailing list, please visit http://acceleratingwealth.com/